India central bank cuts rates for third time this year

The Reserve Bank of India (RBI) cut interest rates for the third time this year on Tuesday, providing a fresh shot in the arm for Asia's third largest economy.

The central bank lowered its key repo rate by 25 basis points to 7.25 percent after lowering it by the same amount in January and March.

The decision was in line with the expectations by majority of economists polled by Reuters. Of 48 economists, 35 expected the RBI to cut the repo lending rate by a quarter percentage point.

RBI Governor Raghuram Rajan said that monetary policy would continue to be data contingent, warning that a below normal monsoon, global crude prices and external sector risks pose a threat to inflation. The central bank projects inflation at around 6 percent by January 2016.

"Today's decision by the Reserve Bank of India (RBI) to cut the repo rate for the third time this year is unlikely to be the last in the current loosening cycle," Shilan Shah, India economist at Capital Economics, wrote in a note following the decision.

"But the RBI can't be complacent about meeting its medium-term inflation target. Given this, we are forecasting only one more 25bp cut in this cycle, which would bring the repo rate to 7.00 percent," he added.

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'We both play together'

Rajan reiterated that the government should avoid putting the burden on the central bank to revive the economy, which he believes is in a "slow recovery".

Gross domestic product (GDP) data out last week showed India's economy expanding 7.5 percent in the January-March period from the year-ago period.

However, nagging concerns remain over the government's new way of calculating its growth data and how the robust growth figures belie broad economic weaknesses.

"The RBI Governor had highlighted his reservations on the new data series in the past, hence policymakers are likely to infer the growth momentum from other lead indicators like industrial production, credit growth, non-oil non-gold imports, PMIs, amongst others," said Radhika Rao, economist at DBS Bank in an note Tuesday, before the RBI announced its decision.

"The common undercurrent there is that growth is coming back to the table, but it has been a gradual process. To that extent, the ongoing recovery trend will be interpreted as modestly positive and not as strong as new headline GDP seems to suggest," she said.

Indian stocks extended losses after the RBI decision, falling almost 1 percent. The rupee traded down 0.3 percent against the U.S. dollar.